Sorry, 10 Super Angels Couldn't Rig The Startup Market If They Tried

If a group of 10 super angels really thought they could collude to fix the valuations of seed funding rounds, the biggest crime is that anyone trusted such fools with their money in the first place.

To be clear: there are some very serious allegations in Michael Arrington’s Angelgate piece. There is nothing wrong with super angels meeting to discuss their shared business, of course, but if, as Arrington told peHub, every charge in the original story is “100% true” then there is a very serious problem. If a group of prominent investors banded together to, say, blackball Y-Combinator, they could do that outfit serious harm.

But at least one of the allegations isn’t so serious: that these investors wanted to take collective action to combat rising seed round valuations. Here’s why:

Tech folks have been very publicly arguing about a “seed bubble” for months now. Just about anyone with an idea and the basic literacy to turn it into a pitch can get funded right now. Some of the super angels are doing deals at a frantic pace — Dave McClure, who admits he was at the meeting, is very open about his strategy of handing out checks as fast as he can sign them — while more traditional VCs are getting into earlier round investments. On top of all that, more and more wealthy individuals are getting into angel investing. As a result of all this activity, valuations are indeed rising.

That’s bad news for super angels, and they would surely love to do something about it. But one thing they certainly can’t do about it is form a cartel to fix valuations. Cartels work where there are very few competitors in a market, that have price distorting power exactly because the market has so few participants. In this case, the entire problem is that there are too many competitors looking to join seed rounds. That isn’t a problem you can solve with a price-fixing cartel.

You could try, we suppose. And if these super angels were trying, that would be wrong, and presumably illegal. But it also would mean that they’re a lot less bright than we thought they were.